Archive for the ‘Financial Crisis’ Category

[digg-reddit-me]How did the GOP oppose Obama during the campaign? They raised fears that he was a radical, Marxist, leftist, Communist, Socialist, Muslim, Arab who hates America.

How did the GOP oppose Obama’s stimulus plan? They claimed it didn’t include tax cuts (which it did) which are the most effective way of stimulating the economy (which most research doesn’t support) that it hasn’t helped the economy at all (something which virtually all mainstream economists disagree with), and that it was part of a socialist government takeover of the economy (which it’s not).

How did the GOP oppose Obama’s health care plan? They claimed there were death panels (nope), government mandated euthanasia and abortion (nope and nope), coverage for illegal immigrants (not at all), secret socialist indoctrination of children (huh?), and that it represented a government takeover of 1/6th of the economy (so far from being true) that would increase the deficit (when it actually reduces the deficit more than any bill in history).

The policies they are attacking include a FDIC tax on the banks to create holdover money to allow regulators to go in and dismantle the company. Contrary to some cushy authority to bailout big firms, Senator Mark Warner describes the process being created by the financial reforms in an interview with Ezra Klein:

“Resolution,” Warner continued, “will be so painful for any company. No rational management team would ever choose resolution. It means shareholders wiped out. Management wiped out. Your firm is going away. At least in bankruptcy, there was some chance that some of your equity would’ve been retained and you could come out in some form on the other side of the process. The resolution that Corker and I have tried to create means the death of the company. The institution is gone.”

The financial reform bill is far from perfect — but it’s a good bill and nothing at all like what the Republicans are describing it as.

The main difference between left and right with regard to property rights is simply that the right is invested in a lot of rhetoric about markets and property rights and the left is invested in different historical and rhetorical tropes.

… Formally, the right is committed to ideas about free markets and the left is committed to ideas about economic equality. But in practice, political conflict much more commonly breaks down around “some stuff some businessmen want to do” vs “some stuff businessmen hate” rather than anything about markets or property rights per se…

Or if you look at the energy sector, you’ll see that businessmen want to push property rights for the stuff that’s in the ground (coal, oil, whatever) and a commons model for the stuff (particulates, CO2) that’s in the air. You can call that “inconsistent” if you like, but obviously it’s perfectly consistent with what coal and oil executives want! And those industries are the most loyal supporters of “right” politics around.

This graph is a political problem for the Obama administration (if not, in the short-term, an economic problem). But it is also necessary for all the other graphs. The bank rescue, which added temporarily to the deficit, stabilized the stock market and set the stage for its recovery. The stimulus, which also added to the deficit, helped moderate the job losses and and has contributed to recent gains. You could’ve made the lines on this graph better, but only by letting the lines on the other graphs get worse.

4. Half-hookers. Lisa Taddeo for New York magazine writes about the burgeoning half-hooker culture which exists in a bizarre alternate reality existing so close to our own where celebrities and finance guys get their women:

The general-admission crowds dance, and the table crowds dance a little more woodenly, a little more entitledly, with their finger pads on their tables. The promoters are dancing with the models and the waitresses are dancing with the bottles and everybody finds a place on the floor.

The floor people, they are just to fill the place up. The celebrities and the athletes and the tycoons are the ones for whom this world is zealously designed. A rung below in after-work pinstripes are the money guys, the Deutsche guys and the Goldman guys and the no-name hedge-fund guys—the “whales”—guys like that one over there in a Boss suit and John Lobb shoes, standing beside the table that cost him $3,000. Standing very close to it, like a Little Leaguer who wants to steal second but has never done it before. This gentleman’s not dancing, but he’s thinking about it.

6. Mailer’s Wife. Alex Witchell profiles Norris Church Mailer, Norman Mailer’s final wife, whose story moved me as I read of it:

John Buffalo Mailer [stepson of Norris:] “People are their best selves and worst selves intermittently,” he told me, “and the best marriages navigate that ride over the hurt, which I believe they did right to the end. They both had options, and at the end of the day the life they created together won out over infidelity, illness and hard times…”

One of the interesting questions about Tainter’s thesis is whether markets and democracy, the core mechanisms of the modern world, will let us avoid complexity-driven collapse, by keeping any one group of elites from seizing unbroken control. This is, as Tainter notes in his book, an open question. There is, however, one element of complex society into which neither markets nor democracy reach—bureaucracy.

Bureaucracies temporarily reverse the Second Law of Thermodynamics. In a bureaucracy, it’s easier to make a process more complex than to make it simpler, and easier to create a new burden than kill an old one.

1. Google v. China. I’ve refrained from posting on the Google v. China battle going on until now. So much of the praise for Google’s decision seemed overblown and I wasn’t sure what insight I had to offer, even as I read everything on the matter I could. But now, the wave of criticism of the company is pissing me off. I get the source of the criticism – that Google is so quickly criticizing other companies for staying in China after it left, and that Google’s partial exit may have made business as well as moral sense. But motives are new pure – we’re human. Those who the critics accuse the company of merely using as a pretext for a business decision see the matter in other terms – according to Emily Parker of the Wall Street Journal, “Chinese twitterverse is alight with words like ‘justice’ and ‘courageous’ and ‘milestone’ “ and condolence flowers and cups being sent to Google’s offices in China.

What the Google/China conflict highlights though is the strategic incompatibility of a tech company like Google and an authoritarian state like China. One of James Fallows’ readers explains why Google and China could never get along:

Internet search and analytics companies today have more access to high quality, real-time information about people, places and events, and more ability to filter, aggregate, and analyze it than any government agency, anywhere ever. Maybe the NSA can encrypt it better and process it faster but it lacks ability to collect the high value data – the stuff that satellites can’t see. The things people think but don’t say. The things people do but don’t say. All documented in excruciating detail, each event tagged with location, precise time. Every word you type, every click you make (how many sites do you visit have google ads, or analytics?), Google is watching you – and learning. It’s their business to. This fact has yet to sink in on the general public in the US, but it has not gone un-noticed by the Chinese government.

The Chinese government wants unfettered access to all of that information. Google, defending its long-term brand equity, cannot give its data to the Chinese government. Baidu, on the other hand, would and does…

The reader goes on to explain how China would slow down and otherwise disrupt Google services in China enough to ensure that Baidu would keep it’s dominant position. This, he explains is:

…just another example of the PRC’s brilliant take on authoritarian government: you don’t need total control, you just need effective control. [my emphasis]

Which is why it is so important that a country like China have constant access to search engine data. In a passage deleted at some point in the editing process from a New York Times story (which an internal Times search reveals to be this one), it was reported that:

One Western official who spoke on condition of anonymity said that China now speaks of Internet freedom in the context of one of its “core interests” — issues of sovereignty on which Beijing will brook no intervention. The most commonly cited core issues are Taiwan and Tibet. The addition of Internet freedom is an indication that the issue has taken on nationalistic overtones.

[T]he most distinctive and admirable of all [America’s] qualities is our liberalism. Now let me be clear: unlike Lowry and Ponnuru, who identify American exceptionalism with the laissez-faire capitalism favored by the libertarian wing of the Republican Party, I do not mean to equate the ideology that dominates one of our country’s political parties with the nation’s exemplary essence. On the contrary, the liberalism I have singled out is embraced by nearly every member of both of our political parties—and indeed by nearly every American citizen. Liberalism in this sense is a form of government—one in which political rule is mediated by a series of institutions that seek to limit the powers of the state and maximize individual freedom: constitutional government, an independent judiciary, multiparty elections, universal suffrage, a free press, civilian control of the military and police, a large middle class, a developed consumer economy, and rights to free assembly and worship. To be a liberal in this primary sense is to favor a political order with these institutions and to abide by the political rules they establish.

The irony of the mandate is that it’s been presented as a terribly onerous tax on decent, hardworking people who don’t want to purchase insurance. In reality, it’s the best deal in the bill: A cynical consumer would be smart to pay the modest penalty rather than pay thousands of dollars a year for insurance. In the current system, that’s a bad idea because insurers won’t let them buy insurance if they get sick later. In the reformed system, there’s no consequence for that behavior. You could pay the penalty for five years and then buy insurance the day you felt a lump.

5. Counter-Counter-Insurgency. Marc Lynch describes a document he recently unearthed which he calls AQ-Iraq’s Counter Counter-insurgency plan. Lynch describes the document as “pragmatic and analytical rather than bombastic, surprisingly frank about what went wrong, and alarmingly creative about the Iraqi jihad’s way forward.”

6. Idiocrats Won’t Change. Brendan Nyhan counters a point I (along with many other supporters of the health care bill) have been making (here and here for example) – that once the bill passes, the misperceptions about it will be corrected by reality. I fear he may be right, but I believe it will change opinions on the margins soon and more so over time.

7. Theories of the Financial Crisis: Men Did It. Sheelah Kolhatkar looks at one theory of the financial crisis some experts have been pushing: testosterone and men.

Another study Dreber has in the works will look at the effects of the hormones in the birth-control pill on women, because women having their periods have been shown to act more like men in terms of risk-taking behavior. “When I present that in seminars, I say men are like women menstruating,” she says, laughing…

Positioning himself as a sort of endocrine whisperer of the financial system, Coates argues that if women made up 50 percent of the financial world, “I don’t think you’d see the volatile swings that we’re seeing.” Bubbles, he believes, may be “a male phenomenon.”

His colleague, neuroscientist Joe Herbert, agrees. “The banking crisis was caused by doing what no society ever allows, permitting young males to behave in an unregulated way,” he says. “Anyone who studied neurobiology would have predicted disaster.”

A very interesting thesis. And one that strikes me as broadly true. I previously explored other theories of what caused the financial crisis:

China is starting to describe its currency interventions as stimulus. But unlike extra government spending in the United States and other countries, currency intervention does not expand global demand, but shifts it from other countries to China.

Today, China is adding more than $30 billion a month to its $2.4 trillion hoard of reserves. The International Monetary Fund expects China to have a 2010 current surplus of more than $450 billion — 10 times the 2003 figure. This is the most distortionary exchange rate policy any major nation has ever followed.

And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset. [My emphases.]

Savio was a revolutionary and civil libertarian, logician and poet, scientific observer and self-aware partisan–and in his heyday a virtuosic extemporizer who seemed not so much to perform all these identities as to incarnate them. He was, in short, an icon of possibility for his generation of student activists; and so it’s a great historical riddle, tinged with pathos, why he was, in Berkeley in 1964, the lightning rod of his time and, almost immediately afterward, a man who couldn’t conduct the energy he’d summoned.

Obama is as he always has been, a center-left pragmatic reformer. Every time he tries to articulate a grand philosophy — from his book ”The Audacity of Hope” to his joint-session health care speech last September — he always describes a moderately activist government restrained by a sense of trade-offs.

According to the Congressional Budget Office, the bill cuts deficits by $130 billion in the first 10 years, and up to $1.2 trillion in the second 10 years. The excise tax is now indexed to inflation, rather than inflation plus one percentage point, and the subsidies grow more slowly over time. So one of the strongest cost controls just got stronger, and the automatic spending growth slowed. And then there are all the other cost controls in the bill: The Medicare Commission, which makes entitlement reform much more possible. The programs to begin paying doctors and hospitals for care rather than volume. The competitive insurance market.

This was a hard bill to write. Pairing the largest coverage increase since the Great Society with the most aggressive cost-control effort isn’t easy. And since the cost controls are complicated, while the coverage increase is straightforward, many people don’t believe that the Democrats have done it. But to a degree unmatched in recent legislative history, they have.

Our long-term deficit is not a function of our current spending, which is manageable. It is a function of our expected spending growth, particularly in health care. With the system growing at 8 percent a year and GDP growing at 2 percent or 3 percent a year, there’s a real long-term problem there. But you can’t cut, or even tax, your way out of it. If you cut 5 percent from the system in one year, that cut disappears by the next year.

5. The Mission. I’m currently reading this 2003 book by Dana Priest who writes for the Washington Post on the military’s mission and how it evolved after the Cold War through the 1990s and into the War on Terror. Absolutely excellent. I highly recommend it.

Luntz’s latest memo advising Republicans on how to fight financial reform, obtained by Sam Stein, is a classic of the genre. The unstated argument of the memo is that, being determined to oppose legislation that most Americans support, Republicans should simply pretend they are arguing against something completely different.

During those times it had power since 1980, the Republican Party has blown out the deficit while in office by increasing spending for their constituencies (the elderly, big corporations, and the military) while cutting taxes for the wealthy a lot and a bit for everyone else. When out of office, the Republican Party has agitated for “fiscal responsibility” by which it apparently means protecting the status quo of spending while cutting taxes even more (and until the aughts, it also included reducing spending on groups that weren’t part of the Republican base.) This strategy was christened “starve the beast” – and it theoretically will culminate in the moment when government spending is so far above government revenue that no increase in taxes could make up for the difference. Thus a generation in the future (probably mine) will need to suffer through increased taxes with minimal government assistance, discrediting the idea of effective government itself.

Bill Clinton responded when he was handed this mess by fixing the fiscal situation he was handed: shelving his proposed spending, reforming welfare, cutting the budget, and keeping taxes as they were. (In fairness, George H. W. Bush also helped fix Reagan’s fiscal irresponsibility.) Obama proposes something different – to keep the economy growing, to “bend the curve” of health care spending, and with some of the fiscal pressure relieved, then to come to some “grand bargain” which will shore up our fiscal situation.

Looking at the politics of the moment, I predicted that the Republican Party (of which the WSJ editorial board is a primary voice) would want no part of any solutions. They would respond to this challenge from Obama by passing off all the responsibility for the increases in taxes or cuts in spending onto the Democrats (despite the facts shown in the graph below) – and would strive to protect the status quo by defending the privileged position their constituencies have – all the while asserting that fiscal disaster is looming.

Democrats are candid, at least in private, about the kind of the deal they have mind this time around. Democrats would agree to means-test entitlements, which means that middle and upper-middle class (i.e., GOP) voters would get less than they were promised…

In return, Republicans would agree to an increase in the top income tax rate to as high as 49% and in addition to a new energy tax, a stock transaction tax, or value-added tax. The Indians got a better deal for selling Manhattan.

New taxes will only reduce the pressure to cut future spending…

The Democrats will use a tax-and-spend commission to confront Republicans with the false choice between huge tax increases or fiscal disaster. Republicans should respond with their own choice: They’ll agree to a deficit commission only if it takes tax increases off the table and forces all of Washington to confront the hard spending trade-offs between guns and butter, old and young, the poor and middle class, and social welfare and corporate welfare. Otherwise, Democrats should be forced to defend and finance their own destructive fiscal choices. [my emphasis]

To rephrase what the Journal is saying, “We oppose any changes to the status quo that would hurt anyone who benefits now. Therefore, we want no part of any solutions to the coming fiscal crisis. But it’s the Democrats fault!” For the Journal, fiscal responsibility is cutting spending. Yet they oppose cutting spending on “middle and upper-middle class (i.e., GOP) voters.” And they also have previously opposed cutting spending on the elderly and the military.

For the Republicans, responsible governance – where spending and revenue are matched – is irresponsible.

Given this ideological position, it’s not surprising that what the WSJ is signaling that they wouldn’t mind spending cuts as long as the Democrats take responsibility for them and those who benefit from the status quo don’t have to give up their privileged position. The Republicans are determined to keep the status quo intact until it becomes unsustainable – and in the aftermath of that fiscal catastrophe, remake the nation by cutting back the role of government. In contrast, the Democrats are committed to making the status quo into a sustainable system, while aiding those who are least privileged.

That’s not even getting to the inaccuracies in the framing of the piece (i.e., the lies at the heart of it.) Ezra Klein posted an excellent graph in response to this op-ed pointing out that the “destructive fiscal choices” the WSJ is attributing to the Democrats can be entirely placed on the Republicans.

Beyond the ten year time window in the graph, the entitlement spending budget explodes because of rapidly growing medical costs and an aging population – but that is exactly the rationale for health care reform that “bends the curve” that Democrats have been pushing and the Journal and Republican Party have opposed.

The country is torn between these two, not completely unrelated, basic impulses out there. One is that Washington is out of control; those people in Washington did this outrageous, take-over-the-economy type of stuff. And the other is that they haven’t done enough to help real people. The crisis came on top of this deep, terrible erosion in the basic level of trust in government and public institutions. That has made it much harder for people to believe that the policies we were [implementing were] going to help.

I recently castigated Glenn Greenwald for the umpteenth time for distorting the world to fit his ideological lens. He, like a significant portion of the left, seems to have turned on Obama. Despite his claims to judge politicians on a case-by-case basis and not to give them support or opposition based on their history, it is clear that Greenwald’s recent attempts at rationally ranting about Obama have a strong emotional core; I extrapolate this from the somewhat tortured manner in which he caricatures the positions of Obama and Obama’s supporters in order to take them down, and the eagerness with which he seems to try to get to his rants in which he loses the remaining bits of common sense he has. Thus, it isn’t that exceptional that he endorsed Matt Taibbi’s recent piece on the Obama administration. While Taibbi is sloppier than Greenwald – and lacks the “fair” persona that Greenwald sometimes adopts – both have a core position: they are anti-establishmentarian. Taibbi though writes news rather than opinion journalism and constantly hides behind the (no-doubt vigorous) fact-checking of his pieces by Rolling Stone – but his most egregious errors are implicit. He writes as if insinuation were fact, which makes him difficult to take seriously whether he is writing about AIG or Goldman Sachs or Obama. And his constant mode is paranoid conspiracy theorist – which certainly fits the moment. Perhaps the best response to Taibbi was to call him the “Sarah Palin of journalism.” And he certainly demonstrated that out-of-the-gate with his first sentence responding to critics:

When we went to print with the latest Rolling Stone piece about Obama’s economic hires, a couple of my sources advised me to expect some nastiness in the way of a response from Obama apologists.

Like Palin, Taibbi defends himself by pointing out who his enemies are, as if their existence makes him right. Granted, Taibbi is a better writer than Palin – and doubtless is better informed. But what he does with his knowledge is create elaborate conspiracy theories embedded in the colorful opinions he gives throughout his news:

The point is that an economic team made up exclusively of callous millionaire-assholes has absolutely zero interest in reforming the gamed system that made them rich in the first place.

Go ahead – fact check that! The main point of his most recent piece seems to be the pernicious effect of Clinton Treasury Secretary, former Goldman Sachs head, and Citibank big shot, Robert Rubin. A good article could be written about this – but Taibbi chose instead to write a piece about Obama’s hypocrisy demonstrated by his embrace of Rubin’s mentees. Taibbi accomplishes this with a quick bait-and-switch, describing the vague hopes people had for Obama during the campaign – that he was “a man of the people” – and then deftly pivoting:

Then he got elected.

What’s taken place in the year since Obama won the presidency has turned out to be one of the most dramatic political about-faces in our history.

Now – this assertion is the core contention Taibbi makes – yet he entirely fails to do several things: (1) to describe what Obama actually campaigned on; (2) to fairly or honestly describe the Rubin/New Democratic positions; or (3) to describe accurately the attempts made by Obama to reign in the financial industry. Instead, Taibbi merely lists the many people who worked for Rubin at some point who now work for Obama as if that proved the audacious opinions he starts his piece with. His entire piece would work better as a footnote supporting one contention in his three paragraph opening.

Tim Fernholz also writes a good piece taking on Taibbi’s anti-Obama screed.

But in this case, Taibbi chose a swift-moving narrative at the expense of an accurate picture of how — and more importantly, where — Wall Street is capturing the political process.

The issue here is not that Taibbi should be nicer to the Obama administration, which is how he’s framing most of the criticism of his article. Quite the opposite, actually. Taibbi is being much too nice to the Obama administration. He’s imbued them with a lot more power than they have.

If the result of the 2010 election is that Obama fires his economics team and moves his administration to the left, but the Republicans pick up 60 seats on the House and move the body to the right, then American public policy outcomes move to the right.

Whatever Charles Krauthammer or Rush Limbaugh may tell you, there is no evidence that Obama is secretly an extreme leftist. On the contrary, he both ran and has governed as a liberal. The various forces on from the left to the center-left rallied around him in 2008 though – seeing hope in his ascendancy. But like all presidents, Obama while campaigning in poetry now faces the challenge of governing in prose.

Yet what is remarkable is how fashionable it has become for respectable voices on the left to hyperventilate and rant against Obama, most often by equating him with George W. Bush. European leftists, unused to America’s slow-moving political system can be forgiven for not appreciating the scope of what Obama is attempting to do, and for the difficulties in doing it. But among mainstream American intellectuals to the left of center, this is harder to understand.*

Reacting to this anti-Obama sentiment on the left, which most often seems to embrace an hysterical tone more appropriate to spurned lovers than political supporters, Andrew Sullivan (who himself recently announced that he could no longer countenance being on the right-wing because what he sees as their odd rejection of Obama’s core conservatism) began to publish emails from readers purporting to “leave the left” because of this demonization of Obama. (In fairness, let me admit that this meme bothered me too: Andrew Sullivan decided to leave the right after every dissenting voice has already been purged. To leave the left over the rants of some of its prominent members is to overreact.)

Glenn Greenwald responded by doing what he does best: He distorted the opposition beyond recognition in order to make his case that they are wrong. He accused these critics of a veneration of Obama similar to the veneration of Bush and Palin among some on the right:

According to these defenders, it’s just wrong — morally, ethically and psychologically — to criticize the President. Thus, in lieu of any substantive engagement of these critiques are a slew of moronic Broderian cliches…Those who venerated Bush because he was a morally upright and strong evangelical-warrior-family man and revere Palin as a common-sense Christian hockey mom are similar in kind to those whose reaction to Obama is dominated by their view of him as an inspiring, kind, sophisticated, soothing and mature intellectual. [my emphasis]

As always, Greenwald has an interesting point – and there is some subset of people who do take the view he is refuting. But it’s far from clear the commentors on Sullivan’s blog do. (Go ahead and read them.) More importantly, Greenwald’s reaction follows exact same emotional logic he is criticizing: Just as these readers of Andrew Sullivan’s blog have created a politically stereotyped parody of the Left based primarily on what bothers them, and react viscerally, emotionally to it, so Greenwald creates his own politically stereotyped parody of Obama defenders, which he then viscerally, emotionally reacts to.

[S]ome of the best arguments about why this war is necessary must go unspoken by the President.

So there are deeply compelling reasons to escalate in Afghanistan. But they’re secret.

Greenwald then goes on a rant about wars justified only by “secret reasons.” Being a fairly intelligent guy, Greenwald clearly knows the difference between things a President cannot say and “secrets” – but he elides this, even contradicts this common-sensical reading, because what his opponent is actually saying does not fit into the political stereotype that Greenwald wants to kick in the groin.

Let me step back again in fairness to Greenwald – who, let me emphasize, I often admire. The way I see it, there are two Glenn Greenwalds. One who will take a step back and observe that Obama is far better than the alternatives and who is able to fairly ascertain that Obama is not guilty of hypocrisy in escalating in Afghanistan and that he should not be blamed for failing to keep those promises he clearly has tried to keep like closing Guantanamo, and who fairly criticizes Obama for a range of issues ranging from Bagram to state secrets.

And then there is the Glenn Greenwald who likes to rant and throw tantrums. The second Greenwald paints the world in vivid colors that bear some resemblance to the more muted colors that my eyes see. The second Greenwald goes on, blithely ignorant of his own more reflective judgments, self-confident and self-satisfied, secure in the knowledge that he himself, merely a critic and holding no formal powers, is above reproach. This second Greenwald is still a useful addition to the political conversation, but in a marginal way.

At his best, Greenwald could be a polemicist, arguing against the conventional wisdom; but he lacks the audaciousness positioning that is the mark of a true polemicist. Too often, Greenwald becomes one of the many voices in our political chorus – a ranter, a talking head.

I would argue the one core principle that allows Greenwald to so often lapse into ranting is his view that: “Political leaders deserve support only to the extent that their actions, on a case-by-case basis, merit that support…” Thus it’s not quite fair to tar Greenwald as someone who abandoned Obama – as he never claimed to embrace Obama. Instead he rationally analyzed and decided to support certain discrete positions Obama took. This is the rationale. But it ignores the second Greenwald certainly who expresses a visceral, emotional distaste for Obama that seems at odds with this rational “case-by-case” analysis of Obama’s actions.

* To be clear, and to preempt attempts to write me off as a victim of Obamania, deluded by hope, I have seriously criticized Obama about Bagram (here and here), on the mere technocratic approach to serious issues (here and here), on his approach to state secrets, and I would endorse several other criticisms of the administration – specifically on their seeming reluctance to embrace what I see as clear principles in regulating the financial industry, on transparency issues, and regarding national security. But I do – at the same time appreciate that Obama is moving in the right direction on these issues – though not on the first two.

[digg-reddit-me]This is part 3 of a 4-part series of posts. Part 1 provided an introduction and description of the groups that benefit from the government spending status quo: the elderly, the military, the poor, and big corporations in that order. The overall societal status quo clearly favors all these groups except the poor. Part 2 described the main political dynamics behind what the Republicans are doing, along with their solutions; it explained why Republicans oppose government intervention in principle, and yet protect the status quo because it benefits those interest groups that support their party – the elderly, the military, and the big corporations. The solution to this political dilemma is to “starve the beast,” to protect the status quo until it becomes so catastrophically unstable that it has to be dismantled; which explains why, when in power, Republicans have both cut taxes and increased spending – protected today’s elderly at the expense of tomorrow’s elderly while trying to force Democrats to take responsibility for the undoubtedly unpopular solutions to the deficit problems created by Republican administrations.

Given this, the next question is: what is the Democratic approach? Do they seek to dismantle the programs that benefit the Republican interest groups? Have they figured out the political answer to the politics of “starving the beast” that so benefit the Republican Party? In short, the answer to both is no. Social Security and Medicare do benefit the elderly – who were the only demographic group to go Republican, even in the aftermath of Bush – but they are historic Democratic programs. They represent in some sense liberalism at its best* – an attempt to soften the roughest edges of capitalism, to ensure that our grandparents and parents are taken care of in their old age. It’s not clear that the Democrats have the political will to go about rescinding subsidies of various sorts to big corporations or to dramatically cut military spending. This doesn’t simply motivate Democratic voters, but the backlash caused by doing so could hurt the party. And the Obama administration’s approach of blaming the short- and mid-term deficit on Bush’s irresponsibility is of decreasing political utility, even if it has the benefit of truth.

What the Democrats offer is at best a partial solution in the hope that before the time is too late, the Republicans will abandon their destructive “starve the beast” strategy. In short, the Democrats are finessing the issue – to avoid the hard clashes that the Republicans claim are inevitable, and that Republicans while in power have made almost inevitable.

What the Obama administration offers now is a 3-part plan – one that is, to some degree, a Hail Mary pass, a desperate attempt to ease long-term deficit before it is upon us.

Step 1: Keep the Economy Going. Part of the urgency for the stimulus early in Obama’s term was the knowledge that if the economy was not growing, then the staggering short term deficits incurred by the Bush administration could prove crippling to the economy. The only way to pay off the debt without causing significant social problems at home or defaulting on the debt is to have a growing economy. This is how stable nations have gotten out of deficit holes such as the one we are in, and how we almost painless paid off massive debt following World War II, following the stagflation of the 1970s, and again in the 1990s. (A constantly growing economy also happens to be an implicit part of the social bargain at the heart of the American dream.) The stimulus was needed because keeping the economy growing was essential to easing the fiscal pressure on America’s mid-term debt.

Step 2: Health Care Reform. Policy wonks – led by Office of Management and Budget Director Peter Orszag – have seen this fiscal timebomb coming for some time. They can see the two root causes of the rapid growth in projected federal expenses:

(1) the aging of our population and

(2) the rapidly rising cost of health care, which has been growing faster in America than in any other nation in the world for the past several decades.

As a necessary precondition for rationalizing our current system, the plan would also significantly extend health insurance – following Milton Friedman’s observation that as health insurance approaches universality, political incentives change to allow for more cost control (even in wholly private systems.) In part this explains how the current health care bills has become not only the most significant effort to expand coverage, but the most significant attempt at cost control in a generation. Mark McClellan, director of the Center for Medicare and Medicaid Services under George W. Bush, for example, called the bill “the right direction to go” while suggesting medical malpractice reform would also be good. (However, as Ron Brownstein observes, “since virtually, if not literally, none of [the Republicans] plan to support the final health care bill under any circumstances, the package isn’t likely to reflect much of their thinking.”) The bill includes pilot projects for almost every other cost control program that those interested in health care believe has promise.

The hope is that if we act now before the imminent wave of Baby Boomer retirements, we will soften the impact of the fiscal timebomb that is entitlement spending. Then, programs can be adjusted without being slashed – as proponents of the “starve the beast” approach would prefer. Our debtors, including the Chinese government, have thus taken a keen interest in the steps we are taking to curtail the growth in health care costs. As one prominent Chinese economist has said, “At some point, if you refuse to contain health care costs, you’ll go bankrupt.”

Step 3: The Grand Bargain. These first two parts were the easy ones. This part is where it gets tricky. If the first two parts of the plan work, the pressure for massive change will be relieved. The mid-term deficit incurred during Bush’s term and during the early Obama years will be less painful in the face of a growing economy. The long-term deficit will still be a problem, but not an insurmountable one if health care costs stop growing so rapidly. Each of these will take tremendous pressure off of our fiscal situation – but neither are enough to make the status quo sustainable. At this point, Obama has said he hopes to strike a “grand bargain,” putting everything on the table, and engaging in a frank discussion of tax reform and entitlement reform, of how America collects money and what it spends the money on. At the moment, with the idiocrats dominating the public debate, this doesn’t seem a very promising route.

Tackling these issues would be many times more explosive than health care as so many groups have a stake in maintaining the status quo. And the biggest flaw in the plan is that by relieving the pressure, the Obama administration may simply put off the day it will be dealt with – no matter how determined they are to deal with these issues. But breaking the grip of the idiocrats was at the core of the promise of Obama’s campaign. And these are core issues Obama was elected to address.

*Contemporary Democrats do not – contrary to the caricature Republicans push – think government and centralized control is the solution to everything; but they do believe that government can be a force for good, that through democracy we can make modest steps and institute policies that improve our society. And despite an organized campaign to suggest otherwise, history has demonstrated this to be true, from the the founding of our nation, the building up of our infrastructure, to that giant social engineering project called abolition, to Social Security and bank regulation, to the Civil Right Movement.